Question

PPI received a promissory note from a customer in the amount of $300,000. The note calls...

PPI received a promissory note from a customer in the amount of $300,000. The note calls for payment of
$100,000 of principal at the end of each year, starting in three years, plus interest at the rate of 14% per year
on the unpaid balance. Only interest is due at the end of the first two years. To accelerate the collection,
PPI immediately discounts the note with Idaho First Bank & Trust which is charging a 12% annual interest
rate. How much will PPI receive in cash from the bank?

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Answer #1

PPI will receive the discounted value of the cashflows from the promissory notes which is discounted @ interest charged by the bank for discounting. ie @12%.

Years Interest Principal Total cash flows Discounting Factor Present Value
Year 1 42000 0 42000 0.892857143           37,500.00
Year 2 42000 0 42000 0.797193878           33,482.14
Year 3 42000 100000 142000 0.711780248        101,072.80
Year 4 28000 100000 128000 0.635518078           81,346.31
Year 5 14000 100000 114000 0.567426856           64,686.66
Amount received by PPI        217,511.86
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